When considering what something is worth, the answer often lies in monetary value. What is less often considered is the value of money itself. That’s no surprise. It seems absurd to question the value of money when money defines the value of our material world. What, though, defines the value of money? Perhaps it is less absurd to question the value of money than it seems. Perhaps the real absurdity lies in the fact that money is, as Jacob Goldstein, author of Money: The True Story Of A Made-Up Thing, puts it, “shared fiction” and is only worth something because the world has collectively agreed that it does.
To demonstrate the phenomenon on a smaller scale, consider the story of the island of Yap. In the late 19th and early 20th century on a Micronesian island called Yap, giant circular stones called fei were used as currency. The diameter of these coins was anywhere from one to twelve feet and they were quarried from limestone on an island 400 miles away. That is not the most ridiculous thing about the fei, though. According to Milton Friedman’s essay “The Island of Stone Money,” a person did not have to physically possess a fei to own it, and “the bare acknowledgement of ownership” was possession enough for the people of Yap since fei were so difficult to transport. The stone coin could be lying at the bottom of the sea and it wouldn’t matter; as long as a person claimed ownership, the fei was owned. In fact, there was a fei that lay on the ocean floor for generations, all the while ownership was passed from family to family.
The German government later proved that taking this money away was just as easy as claiming it. When Germany took control of Yap in 1898, it wanted the islanders to fix Yap’s roads. To encourage cooperation, Germany “marked” the fei with “a cross in black paint” to indicate ownership by Germany, Friedman relates. Those simple black crosses threw the islanders into poverty and did indeed push them to fix the roads. Once the people of Yap had done their job, the German government simply washed the fei of black markings and suddenly, the islanders were wealthy once again. It seems absurd that wealth- which did not have to be possessed to be owned in the first place- could be taken away and granted by painting and removing markings. It seems like the sort of thing that could only happen on a primitive Micronesian island. However, something similar occurred between France and the United States in 1932-1933. When the Bank of France was concerned that the gold standard value would not remain constant in the U.S dollar, it requested that the Federal Reserve convert its assets to gold. Instead of shipping the gold to France, the Federal Reserve simply sectioned off the right amount of gold for France in the Bank of New York and marked it off. Then, even though the gold remained in New York, the perceived ownership by France caused the franc to become more valuable than the dollar and even contributed to the Banking Crisis of 1933. It’s really not so different from Germany and the Island of Yap.
Another example of the grand fantasy that is money can be found in ancient China. For a time, China used physical coins as currency, and the worth of those coins was equivalent to what the coins were made of. Something like an iron coin wouldn’t be worth much, and it would take a lot of coins to pay for something. Instead of going through the hassle of exchanging so many iron coins, merchants would give people a note that vouched for a person’s ownership of their coins. Mongol emperor Kublai Khan observed this and decided that the coins didn’t have to be part of the equation at all. He decided that the paper notes would be the new form of currency, and China prospered under the new, more abstract idea of money. Eventually, though, paper money was overproduced and it caused inflation, and a new emperor got rid of paper money entirely and went back to using grain for commerce. In the words of Jacob Goldstein, mentioned earlier, the “economic flourishing that had happened, it just [went] away” and the wealthy suddenly became poor. The value of these paper notes completely changed over time. At first they were backed by physical wealth, then they were backed by sheer faith, and then they were nothing.
That, though, is history. Just old civilizations figuring out how to build an economy. The world must have a less abstract view of money now. Alex Blumberg and David Kestenbaum of NPR’s Planet Money team looked into exactly that by investigating the power of America’s central bank, the Federal Reserve. That power boils down to “conjuring money out of the void,” in the perfectly chosen words of Blumberg. So, no, money is not less abstract now than it was before- it’s more abstract than ever. It truly is like magic. All it takes to put billions of dollars into the economy is a few clicks on a keyboard and the press of a button. The Fed buys large amounts of treasury bonds from banks, who then distribute money into the economy. That transaction happens by someone at the Fed accessing a bank’s account on a computer, typing a few more billion dollars into that account, and pressing a button to finalize it. Money was already abstract enough. The retirement of the gold standard meant that the physical dollar was officially worth nothing more than our belief in it, but now the physical dollar isn’t even needed. A computer is all that is necessary.
While the technology of commerce has come a long way- giant stone coins are certainly no computer screen- our concept of money has historically, absurdly rested on little more than faith. The admission must be made: money is just a little bit funny.
Friedman, Milton. The Island of Stone Money. Hoover Institution, Stanford University, 1991.
King, Noel. “What Is Money? Jacob Goldstein’s Book Explains ‘Shared Fiction’.” NPR, NPR, 8 Sept. 2020, http://www.npr.org/2020/09/08/910586930/what-is-money-jacob-goldsteins-book-explains-shared-fiction.
Glass, I., Joffe-Walt, C., Blumberg, A., & Kestenbaum, D. (2018, February 19). The Invention of Money. Retrieved September 18, 2020, from https://www.thisamericanlife.org/423/the-invention-of-money